Restructure Proposals


 
TIDMCHY 
 
City Merchants High Yield Trust plc 
 
23 February 2012 
 
Recommended proposals for reconstruction and voluntary winding up 
 
On 3 October 2011 the Company announced that it was considering proposals for 
the assets of the Company to be transferred to an offshore-domiciled successor 
vehicle in order to continue to deliver tax-efficient investment returns from 
high-yielding fixed-interest securities. 
 
The Board has today published a Circular in connection with recommended 
proposals for the reconstruction and voluntary winding up of City Merchants 
High Yield Trust plc (the "Company") and the transfer of the assets of the 
Company to City Merchants High Yield Trust Limited ("CMHYTL") (the 
"Proposals"). CMHYTL is a newly-formed closed-ended investment company 
incorporated in Jersey, Channel Islands and established as a collective 
investment fund, authorised by the Jersey Financial Services Commission as a 
listed fund. CMHYTL will be the offshore successor to the Company if the 
Proposals are approved and implemented. CMHYTL has today published a prospectus 
in connection with the Proposals (the "Prospectus"). 
 
Enquiries 
 
Guy Short, Invesco Asset Management - 020 7065 3000 
 
Clive Nicholson, Chairman, City Merchants High Yield Trust plc - 020 8741 4000 
 
Neil Morgan, Winterflood Investment Trusts - 020 3100 0292 
 
BACKGROUND 
 
The Company is resident in the United Kingdom for tax purposes and has 
historically been approved as an investment trust. UK companies which qualify 
for tax purposes as investment trusts are exempt from UK corporation tax on 
realised capital gains. The exemption from tax applies to capital profits but 
the Company remains taxable on its income profits. A significant proportion of 
the income received by the Company from its investment portfolio, being derived 
mainly from fixed-interest securities, is therefore liable to UK corporation 
tax. 
 
In recent years, the Company's ability to pay dividends has been enhanced 
because it has been able to reduce its liability to UK corporation tax through 
offsetting against taxable income the surplus management expenses which arose 
through the merger with Exeter Selective Assets Investment Trust plc in 
November 2005. 
 
These surplus management expenses are now nearly exhausted and the Company is 
writing down the associated deferred tax asset on its balance sheet, which is 
giving rise to a tax charge of an amount equal to the amount of the write down. 
Consequently, the Company has incurred a tax charge in each of the years ended 
31 December 2010 and 31 December 2011 and, for the same reasons, would incur a 
tax charge for the current financial year if the Company continued in its 
present form. Thereafter, the surplus management expenses having been 
exhausted, the Company would be liable to UK corporation tax on the full amount 
of its taxable investment income. Such a tax charge would have a significant 
and recurring impact on distributable reserves, which would reduce dividends 
and total returns to Shareholders. Based on current revenue levels, it is 
estimated that a full annual UK corporation tax charge would be approximately GBP 
1.9m, equivalent to approximately 2.6 pence per Share. 
 
The Directors, together with the Company's advisers, have examined methods to 
enable the Company to continue to deliver tax-efficient investment returns to 
Shareholders from high-yielding fixed-interest securities. The Board has 
determined that the best interests of Shareholders as a whole would be served 
by transferring the assets of the Company to CMHYTL in exchange for the issue 
of shares in CMHYTL to the Shareholders. The Board has chosen Jersey because of 
the established practice of Invesco Asset Management Limited (the "Investment 
Manager") in Jersey, together with its relationships with services providers 
there. 
 
As a consequence of the Proposals the Company has written off GBP1.445 million of 
the deferred tax asset on the Company's balance sheet equivalent to 2.0 pence 
per Share, representing the estimated value of surplus management expenses that 
will be unused at the Effective Date. Although this will negatively affect the 
Net Asset Value, there would be a similar impact if the Proposals were not 
implemented and the Company continued in its present form, as it is estimated 
that the deferred tax asset would be written off fully by the end of 2012. 
Therefore, although the write-off of the tax asset is accelerated, the Company 
will not lose any tax benefit by moving offshore. 
 
BENEFITS OF THE PROPOSALS TO THE COMPANY 
 
The Proposals are intended to put Shareholders in a position equivalent to 
previous years when the Company had sufficient surplus management expenses to 
offset fully its liability to UK corporation tax. The Proposals are expected to 
provide the following benefits for CMHYTL: 
 
* CMHYTL will not be subject to UK corporation tax, which should significantly 
increase its net distributable income as compared with the Company and thereby 
enhance total returns; 
 
* any uncertainty over the Company's tax situation that may have affected trade 
in the Shares will be removed; and 
 
* CMHYTL may enjoy increased flexibility as compared with the Company because 
it will not seek to be approved as an investment trust in the UK. 
 
Following implementation of the Proposals, the annual running costs of CMHYTL 
will not be materially different from those currently paid by the Company. 
 
Additionally, for Shareholders who are liable to stamp duty or SDRT when 
purchasing Shares, such taxation would not be due when purchasing CMHYTL 
Shares. 
 
IMPACT OF THE PROPOSALS ON SHAREHOLDERS 
 
If the Proposals are approved and implemented, the Company's assets will be 
transferred to CMHYTL and Shareholders will receive one CMHYTL Share for each 
Share held on the Record Date. Shareholders will receive a Special Dividend 
from the Company and, following the Scheme becoming effective, will receive 
future dividends from CMHYTL. Further information on dividends is given below. 
 
Save for UK individuals who hold (or are deemed to hold) at least 10 per cent. 
of CMHYTL's Shares and small companies, as defined in section 931S Corporation 
Tax Act 2009, under current legislation the UK tax treatment of dividends 
received from CMHYTL will be the same as the UK tax treatment of dividends 
received from the Company. All CMHYTL Shareholders will benefit from greater 
distributions compared to those they would have received in future if they were 
to remain invested only in the Company, which is tax resident in the UK. This 
is in consequence of CMHYTL being zero-rated for tax in Jersey and, 
accordingly, not being liable to any Jersey tax on its income or gains. 
 
SUMMARY OF THE SCHEME 
 
In order to implement the Proposals shareholder approval is sought to implement 
a scheme of reconstruction whereby the Company will be placed into members' 
voluntary liquidation. As part of the liquidation, after provision has been 
made for the Liquidation Fund required to discharge its liabilities (including 
contingent liabilities) and the costs incurred by the Company in relation to 
the Proposals as referred to below, the Company's investments and other assets 
will be transferred in specie, in accordance with the Transfer Agreement, to 
CMHYTL. 
 
Shareholders will then receive one CMHYTL Share for every Share held by them. 
CMHYTL's investments will be managed by the Investment Manager, the Company's 
existing investment manager, on substantially the same terms as the Company is 
currently managed and the CMHYTL Shares will be listed on the Official List 
with a premium listing and traded on the main market of the London Stock 
Exchange in the same way that the Shares are currently listed and traded. 
 
DIVIDENDS AND ANNUAL REPORT AND ACCOUNTS 
 
On 17 January 2012, the Directors declared an Interim Dividend of 2.5 pence per 
Share in respect of the quarterly period ended on 31 December 2011 which the 
Directors intend to pay to Shareholders on the register at 6.00 p.m. on 27 
January 2012. The Shares went ex-dividend on 25 January 2012 and the Interim 
Dividend is scheduled to be paid on 24 February 2012. 
 
On 22 February 2012, the Directors declared a Special Dividend of 2.4 pence per 
Share which the Directors intend to pay to Shareholders on the register at 6.00 
p.m. on 9 March 2012. The Shares will go ex-dividend on 7 March 2012 and the 
Special Dividend is scheduled to be paid on 28 March 2012. 
 
It is intended that for the period from Admission to 31 December 2012, on the 
basis of current market conditions, CMHYTL will target a dividend of 7.6 pence 
per CMHYTL Share which, together with the Special Dividend to be paid by the 
Company, would represent total dividends of 10.0 pence per share in respect of 
the 12 months to 31 December 2012. This is a target dividend level which is 
based on certain assumptions and does not constitute a profit forecast. There 
can be no guarantee that the target dividend level will be achieved. 
 
The board of CMHYTL intends to pay quarterly dividends in February, May, August 
and November each year with the first such dividend to be paid in August 2012. 
 
CITY MERCHANTS HIGH YIELD TRUST LIMITED 
 
Investment objective and policies 
 
CMHYTL will have the same investment objective as the Company, which is to seek 
to obtain both high income and capital growth from investments predominantly in 
high yielding fixed-interest securities. CMHYTL will seek to provide a high 
level of dividend income relative to prevailing interest rates through 
investment in fixed-interest securities, various equity-like securities within 
fixed-income markets and equity-linked securities such as convertible bonds and 
in direct equities that have a high income yield. It will also seek to enhance 
total returns through capital appreciation generated by investments which have 
equity-related characteristics. 
 
CMHYTL will have the same investment policy as the Company. It will be actively 
managed and will seek to ensure that its portfolio is diversified, having 
regard to the nature and type of securities (including duration, credit rating, 
performance and risk measures and liquidity) and the geographic and sector 
composition of its portfolio. CMHYTL may hold both illiquid securities (for 
example, securities where trading volumes are relatively low and unlisted 
securities) and concentrated positions (for example, where a high proportion of 
CMHYTL's total assets is comprised of a relatively small number of 
investments). 
 
CMHYTL will adopt the same investment limits as the Company as follows: 
 
  * CMHYTL may invest in fixed-interest securities, including but not 
    restricted to preference shares, loan stocks (convertible and redeemable), 
    corporate bonds and government stocks, up to 100 per cent. of total assets; 
 
  * investments in equities may be made up to an aggregate limit of 20 per 
    cent. of total assets at the time a new investment is made; 
 
  * the aggregate value of holdings of shares and securities in a single issuer 
    or company, including a listed investment company or trust, will not exceed 
    15 per cent. of the value of CMHYTL's investments at the time of 
    investment; and 
 
  * investments in unlisted investments will not exceed 10 per cent of CMHYTL's 
    total assets for individual holdings and 25 per cent. in aggregate of total 
    assets at the time a new investment is made. 
 
CMHYTL may enter into derivative transactions (including options, futures and 
contracts for difference, credit derivatives and interest rate swaps) for the 
purposes of efficient portfolio management. CMHYTL will not enter into 
derivative transactions for speculative purposes. CMHYTL may hedge against 
exposure to changes in currency rates to the full extent of such exposure. 
 
CMHYTL's gearing policy will be determined by its board. The level of gearing 
may be varied from time to time in light of prevailing conditions subject to a 
maximum of 30 per cent. of CMHYTL's total assets from time to time. 
 
Board composition 
 
The board of CMHYTL will be comprised of Clive Nicholson and Winifred Robbins, 
who are currently directors of the Company, and Philip Austin, John Boothman 
and Philip Taylor who are Jersey resident (and who are not directors of the 
Company). These changes to the Board result from the requirement for CMHYTL to 
have a majority of non-UK resident directors. 
 
Investment Manager and other service providers 
 
As stated above, the Company's existing investment manager, Invesco Asset 
Management Limited, will be appointed to act as investment manager of CMHYTL on 
substantially the same terms, including as to fees, as those on which it is 
currently engaged with the Company. 
 
CMHYTL has appointed R&H Fund Services (Jersey) Limited as its company 
secretary and administrator in Jersey. The Bank of New York Mellon, the 
Company's existing custodian, will be appointed as custodian to CMHYTL and 
Capita Registrars (Jersey) Limited has been appointed as its registrars. 
 
ISA, SIPP and SSAS investors 
 
CMHYTL Shares will be eligible for inclusion in the stocks and shares component 
of an ISA. CMHYTL Shares will also qualify as an investment that may be held in 
a SIPP or SSAS. Accordingly, where existing Shares are held in an ISA, SIPP or 
SSAS, CMHYTL Shares obtained pursuant to the Scheme in respect of those Shares 
can be retained (subject to the specific terms applicable to the relevant ISA, 
SIPP or SSAS) within the ISA, SIPP or SSAS. 
 
COSTS OF IMPLEMENTATION OF THE PROPOSALS 
 
The costs and expenses relating to the Proposals to be paid by the Company, 
including legal and other professional costs, additional Directors' fees, the 
costs of printing this document and the costs relating to the liquidation of 
the Company (excluding GBP50,000 retained by the Liquidators in respect of 
contingent and unknown liabilities) are estimated to amount to GBP335,000 
including VAT. In recognition of the additional work undertaken on behalf of 
the Company in connection with the Proposals, the Directors will receive 
additional fees equal to one quarter of their current respective annual 
remuneration. 
 
A further GBP515,000 is estimated to be payable in connection with the launch of 
CMHYTL. This amount (which is not subject to VAT as CMHYTL is incorporated and 
registered in Jersey) will be payable by CMHYTL and will be provided for upon 
its launch. 
 
OVERSEAS AND DISSENTING SHAREHOLDERS 
 
Subject to certain exceptions, Overseas Shareholders who have registered 
addresses in Restricted Jurisdictions will not be issued CMHYTL Shares pursuant 
to the scheme. Such Overseas Shareholders will have their interests purchased 
by the Liquidators at a price equal to their respective entitlements under the 
Scheme. 
 
Shareholders who do not vote in favour of the special resolution at the First 
EGM can express their dissent from the Scheme in writing to the Liquidators at 
the Company's registered office within seven days after the passing of the 
special resolution. Any such dissenting Shareholder may require the Liquidators 
either, at the Liquidators' option, to abstain from carrying the resolution 
into effect or to purchase such Shareholder's interests at a price to be agreed 
between them or determined by arbitration. 
 
FURTHER INFORMATION 
 
The Proposals are conditional on the resolutions to be proposed at the EGMs 
being passed. 
 
Copies of the Circular and Prospectus will be submitted to the National Storage 
Mechanism and will shortly be available for inspection at www.hemscott.com/ 
nsm.do. 
 
Copies of the Circular and Prospectus can be viewed at the offices of Ashurst 
LLP, Broadwalk House, 5 Appold Street, London, EC2A 2HA 
 
Capitalised terms in this announcement have the same meaning as that set out in 
the Circular of the Company dated 23 February 2012. 
 
                              EXPECTED TIMETABLE 
 
                                                                          2012* 
 
Ex-dividend date for the Shares in respect of the                    25 January 
Interim Dividend 
 
Record date for the Interim Dividend                                 27 January 
 
Payment of Interim Dividend                                         24 February 
 
Ex-dividend date for the Shares in respect of the                       7 March 
Special Dividend 
 
Record date for the Special Dividend                                    9 March 
 
Latest time and date for receipt of Forms of Proxy       12.30 p.m. on 20 March 
for the First EGM 
 
First EGM                                                12.30 p.m. on 22 March 
 
Date from which it is advised that dealings in                         26 March 
Shares should only be for cash settlement and 
immediate delivery of documents of title 
 
Latest time for receipt of Forms of Proxy for the        12.30 p.m. on 28 March 
Second EGM 
 
Payment of Special Dividend                                            28 March 
 
Record date for the Scheme                                6.00 p.m. on 28 March 
 
Shares disabled in CREST**                                6.00 p.m. on 28 March 
 
Shares reclassified, Official List amended and            8.00 a.m. on 29 March 
dealings in Reclassified Shares commence on the 
London Stock Exchange 
 
Listing of Reclassified Shares on the Official            7.30 a.m. on 30 March 
List suspended 
 
Second EGM                                               12.30 p.m. on 30 March 
 
Effective date for implementation of the Proposals                     30 March 
 
Date on which the Company's assets are transferred                      2 April 
to CMHYTL 
 
Dealings commence in CMHYTL Shares                         8.00 a.m. on 2 April 
 
Shareholders holding Shares in uncertificated form         8.00 a.m. on 2 April 
credited with CMHYTL Shares 
 
Certificates for CMHYTL Shares despatched                           by 16 April 
 
* All references in this document to times are to London times. 
 
** For the avoidance of doubt, the Register will remain open until the 
Effective Date. 
 
It is expected that the listing of the Shares will be cancelled on or as soon 
as practicable after 30 March 2013. 
 
 
 
END
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